Retirement fund benefits for employees who worked abroad: the apportionment rules

The
apportionment rules to SA retirement fund benefits due to SA residents
who contributed to these funds while working abroad, was changed with
effect from 1 January 2012. SARS holds the view that lump sum benefits
should be treated differently from annuity payments because of their
strict interpretation of the meaning of a pension payment. This issue is
currently being addressed by SARS and National Treasury.

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The
application of the apportionment rules to South African retirement fund
benefits due to South African residents who contributed to these funds
while they worked abroad, is currently not clear. The South African
Revenue Service ("SARS”) holds the view that lumps sum benefits should
be treated differently from annuity payments. This view impacts on the
tax treatment of provident fund payments and the lump sum portion of
pension fund payments.

The apportionment rules as they applied to December 2011

The
Income Tax Act ("the Act”) contained specific statutory source rules
that applied to the apportionment of pension fund benefits. Previously,
section 9(1)(g)(ii) in principle, provided that a portion of a pension
granted to an individual would be deemed to be from a source within
South Africa, if the services were rendered in South Africa for at least
2 years during the 10 years immediately preceding the date on which the
pension first became due. The application of this statutory rule meant
that a resident who worked outside of South Africa for more than 2 out
of the 10 years prior to his retirement would be able to applythe
apportionment rules and exempt all or a portion of his/her pension
benefit, depending on the amount of time he/she spent working outside of
South Africa.

The apportionment rules applicable from January 2012

Section
9 of the Act has been amended with effect from 1 January 2012. This
also affects the source rules applicable to retirement fund payments and
consequently, the apportionment of these benefits.

In terms of
section 9(2)(i) of the Act, an amount is deemed to have been received by
or accrued to a person from a source in South Africa if that amount
constitutes a pension and the services in respect of which that amount
is so received or accrues were rendered in South Africa. However, in
terms of the proviso to section 9(2)(i), if the amount is received for
services which were rendered partly within and partly outside South
Africa, the portion of the amount to be included in the individual’s
taxable income must be calculated pro rata to the time spent rendering
services in South Africa, e.g. if 4 out of any 10 years’ of services
were rendered in South Africa, 40% of the pension will be sourced here.

The
portion of the pension which is sourced outside South Africa in terms
of this provision and is received as consideration for past employment
outside South Africa will be exempt from South African tax in terms of
section 10(1)(gC) of the Act.

Concern with lump sum payments

The
apportionment of retirement fund benefits have been simplified through
the amendment of the source rules and certainly provide some clarity
going forward for individuals working abroad.

The issue we have
encountered with SARS is, however, that they only apply the
apportionment rules to annuity payments and not to the lump sum
component of retirement fund payments. This appears to be because of
their strict interpretation of the meaning of a pension payment.

We
do not agree with this view because retirement fund lump sum benefits
are specifically included in the gross income of a taxpayer in paragraph
2(1) of the Second Schedule to the Act.

SARS’ current view of
the treatment of lump sum benefits unfairly prejudices individuals who
have participated in a provident fund. The effect of their view is that
individuals who retire from a provident fund and receive a lump sum
benefit are not able to claim a tax exemption in respect of the portion
that relates to their services rendered outside South Africa. It is
unclear, why in principle, the apportionment rules relating to lump sum
payments should be any different from those applicable to annuity
payments. This view also does not correspond with international
guidelines set out in the OECD commentary.

We understand that the
issue is currently being addressed by National Treasury and SARS and
hope for clarification and confirmation of the uniform treatment in the
next set of legislation.

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